Oil Price Effect on Food Inflation in Pakistan: A Time Series Analysis

Abstract

Importance: Food inflation is a pressing concern for oil-importing developing economies, disproportionately harming low-income households, and crude oil prices embedded in fuel, fertilizer, and transport costs are a key driver of the inflation.

Research Gap: Few Pakistan-focused studies jointly estimate short-run and long-run oil price effects on food inflation within a single ARDL model that also controls for exchange rate and agricultural growth, leaving policymakers without an integrated framework for this specific transmission channel.

Objective: This study examines the extent to which oil price fluctuations transmit into food inflation in Pakistan, both in the short run and long run, while controlling for exchange rate and agricultural growth.

Methodology: Using annual time-series data from 1991 to 2025, the Augmented Dickey-Fuller (ADF) test was applied to determine the order of integration of each variable, followed by the Autoregressive Distributed Lag (ARDL) bounds-testing approach to establish long-run cointegration and an Error Correction Model (ECM) to estimate short-run dynamics and the speed of adjustment.

Key Findings: Oil price significantly raises food inflation in both the short run (0.270) and long run (0.280), the exchange rate shows opposite short-run (positive) and long-run (negative) effects; agricultural growth is insignificant; and the error correction term (−0.847) confirms fast adjustment, correcting 85% of disequilibrium within a year.

Implications: Oil prices are a persistent driver of food inflation in Pakistan, warranting energy buffers, renewable diversification, exchange rate monitoring, and stronger agricultural policy.

Keywords: Oil price, food inflation, exchange rate, agricultural growth, ARDL bounds testing, Pakistan

https://doi.org/10.5281/zenodo.23192986